The three major stock indices have reached all-time market highs, leaving some investors to ponder if the rally will last or if these levels are an indicator of irrational exuberance.
The highs reached by the Dow, S&P 500 and Nasdaq could lead to a pullback as anxious investors are wary of these levels. The Dow, which closed at 18,573 on Wednesday, could continue its upward moves and hit 19,000, said Patrick Morris, CEO of NY-based HAGIN Investment Management. If the Dow reaches that level, investors should expect a pullback to 17,750 and then a run to 20,000.
"After that, all bets are off since that would take us into November and the market will react to the election," he said.
The recent momentum is not a fundamental rally, but a momentum rally based on the "low levels of returns available in other assets," Morris said. "I couldn't fathom buying Treasuries at this point and corporate debt seems pretty stretched in terms of valuation."
The amount of liquidity in the market is high, but the risks are immense and getting out the market is not the solution, especially for investors with retirement portfolios, he said.
"The big issue is that there is a hell of a lot of money in the system," Morris said.
Timing the market can have severe consequences, but missing a 10% or 20% rally is a "huge miss," he said. "So far our bet on 19,000 is looking more like a great call."
Why the Rally Will End
Experts have pointed to various technical indicators that the current rally cannot be sustained for much longer.
These highs could be a sign that a pullback is in the works since economic data, including GDP and corporate earnings, are not demonstrating economic prosperity. Exuberant investors call to mind the actions of Icarus, the figure from Greek mythology who flew too close to the sun; they are seeking to ride the market sky high but are not factoring in the high levels of consumer debt, said Jason Spatafora, co-founder of Marijuanastocks.com and a Miami-based trader and investor known as @WolfofWeedST on Twitter.
"In my opinion, the Dow and S&P 500 have defied all logic with greed overtaking fear based off how markets are supposed to react," he said.
A cooling off period should have occurred in the aftermath of the Brexit vote and would have shown "how susceptible the markets were to steep declines," Spatafora said. "Admittedly, my contrarian positions have been killed by the irrational exuberance of the market being fueled by central banks."
Even if the Dow rises by another 1%, Spatafora said the market will retrace its gains. The largest indicator is that despite the market's achievement of an all-time high, the trade volume remains extremely low.
"Traders will be looking to take a profit, shaking the greedy and exposing the fragile veneer of market prosperity," he said. "The selloff could culminate in a cascade of tears and loss of 200 points, and that's without factoring in a rate hike or the potential for China devaluing their currency."
Market Not Overbought Like 1999
The last time the market reached these highs was in 1999 when tech stocks were supporting the majority of the market volume. Today's equities are not as overbought, because other sectors such as health care, energy and real estate are moving the market higher, said Jon Ulin, a managing principal of Ulin & Co. Wealth Management in Boca Raton, Fla.
"Most of our retired and Baby Boomer clients are enjoying the ride and have not expressed any fears over the recent market highs," he said. "We are recommending for our clients to stay fully invested in their diversified portfolios this year."
The Dow could increase another 3% to reach 19,000 before retreating by 5% to 10% due to the uncertainty of the presidential election. The Dow could move higher in the outcome and regain its momentum during the holiday shopping season. Although price-to-earnings ratios are high, stocks should move higher with returns averaging 6% to 8% for 2016.
"The bull market may be overpriced and the additional gains over the next couple of months will be partially fueled by the Fed's dovish policy on rate hikes causing more investors and managers to plow money into stocks," Ulin said. "While there are ominous signs of a pullback with a recent spike in options contracts and a $9.8 billion inflow into bonds, the U.S. stocks and bonds appear to be the safest port in the storm."
After the election, it is possible the Dow could even reach 20,000, since interest rates remain historically low and investors are drawn to the higher yield on equities compared to bond yields, said Robert Johnson, president of The American College of Financial Services in Bryn Mawr, Pa.
"Once the Fed starts to raise rates, I believe we will see lower returns in the equity markets than we have seen over the past eight years on average since research shows that stock returns are much higher in a falling interest rate environment," he said.